Verizon May Need to Sell $23.5 Billion Worth of iPhones by End of the Year

Verizon is obligated to sell $23.5 billion worth of iPhones this year under the terms of its 2010 agreement with Apple. Should the carrier fall short of that goal, it could find itself on the hook for billions of dollars in payments to Apple. And with demand for the device more sluggish than expected this year, Verizon may well find itself in that unpleasant situation.

That’s the theory put forth by former Sanford C. Bernstein & Co. analyst Craig Moffett, who recently spent some time chewing through Verizon’s 20-F filings with the SEC. According to Moffett’s reading of those documents, Verizon must this year somehow sell double the number of iPhones it sold last year to meet its multiyear purchase commitment to Apple. And he’s not confident that will happen, since each year Verizon has come in below the prior year’s iPhone commitment. And if that’s the way things play out, the carrier could owe Apple somewhere between $12 billion and $14 billion.

Which would make for an uncomfortable situation at both companies. So, what might Apple do?

“It isn’t clear that Apple has any incentive to blow up [its Verizon] relationship by taking a hard line, nor is it likely that Apple would wish to advertise that … large partners are falling, or will fall, so far short of their purchase obligations,” Moffett wrote. “Still, it is likely that Apple would be reluctant to simply ignore these commitments, since many other carriers around the world are likely in a similar boat and a simple amnesty would set an unwanted precedent.”

That’s a reasonable conclusion. It’s hard to imagine Apple allowing a shortfall like that to slide, should it occur. But how will it handle concessions, when disclosing them acknowledges slowing sales of a flagship product?

It’s worth noting that Moffett isn’t the only guy predicting this sort of scenario. Stuart Jeffrey of Nomura is as well. He figures Verizon could end up owing Apple $12 billion, leaving the iPhone maker facing a tough decision.

“If Apple does not impose terms on Verizon Wireless, then other operators may believe that they too will not be punished by missing their commitments,” Jeffery wrote. “The result of this could be that operators reduce their marketing support for the iPhone, in the hope of steering demand to Android phones that incur lower subsidies.”

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— Author Tim Kreider on not getting paid for one’s work

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